The North Carolina Department of Revenue (DOR) has issued a new notice that provides guidance on activities related to repair, maintenance and installation (RMI). The memo outlines whether these various activities are subject to sales tax on labor.

The intent of the guidance is to address increasing confusion over the application of 2016 statutory changes that modify the taxation of repair, maintenance and installation (RMI) services, which took effect January 1 of this year.

The RMI sales tax law required subcontractors who met the definition of ‘retailer’ to charge sales tax on their labor. For a number of North Carolina subs who offer turn-key services to builders in both new construction and remodeling activities, this created confusion over what services are subject to taxation and which are not. The question often turned on who was performing the service rather than the service itself, creating an uneven playing field.

Amendments approved last year clarify that labor pursuant to a “real property contract” (which is between a real property contractor and another person to perform construction, reconstruction, or remodeling with respect to a capital improvement) is now exempt from taxation. A “capital improvement” is defined as “an alteration to real property that is new construction, reconstruction, or remodeling of a building, structure, or fixture on land that becomes part of the real property or is permanently installed in the real property”.

The new guidance issued by DOR clarifies which transactions would generally constitute a real property contract with respect to a capital improvement to real property, when performed for new construction, reconstruction, or remodeling. REBIC believes additional statutory changes are needed to exempt fees collected through property management contracts, and will continue to work with our state associations to ensure these changes are adopted by the General Assembly.